The Online Resource for FinancialAdvisors Going Fee-based

Advice Pays—As Much as 2.9% per Year

We are consistently asked to define the value of financial planning and investment management advice. A recent study looked at advice during the Great Recession by comparing the investment results of investors that had advice and those that didn’t. The results were quite favorable for the advice industry. Advisors looking for ways to communicate their value to clients should consider sharing the following investor-friendly article (pdf version) we prepared for advisors using our services.

Financial advisors and professional money managers provided investors significant value before, during and after the Great Recession. So says a study by human resources consulting firm Aon Hewitt. Their study, “Help in Defined Contribution Plans: 2006 Through 2010,” explores how investors who had investment help faired versus investors who didn’t.

In the study, Aon Hewitt looked at the investment behavior of over 425,000 individual defined contribution plan participants and their $25 billion in assets. Investors were divided into two groups: those receiving help (from a managed account, a target date fund or plan-provided investment help) and those who managed their investments on their own (the study refers to them as Non-Help investors).

The study uncovered three fascinating insights about the performance of investors with help versus those without (i.e., Non-Help investors).

Investors who received help had better returns with less risk than those who didn’t. This was true across all age groups and market conditions studied.

Investors who had help outperformed those who didn’t by a median annual return of 2.92% over the five-year period from 2006 to 2010.

The downside of 2008 was about the same for both Help and Non-Help investors, but the upside returns of 2009 were noticeably different. Non-Help investors tended to have more concentrated portfolios, and they didn’t fully participate in the recovery.

Let’s give some context to the magnitude of the 2.92% median annual return advantage that investors with help received. Over 5 years, the length of time of the study, an investor with help would have 14%* more wealth than a Non-Help investor. Over 10 years, that number grows to a 30% advantage, and over 20 years it is a 70% advantage.

Why did the Non-Help investor underperform?
The study found that the poor performance of the Non-Help group came primarily from two sources: 1) inappropriate risk levels and 2) inefficient portfolios. For every age range, Non-Help investors had riskier, more volatile portfolios than investors who had help.

This is the latest tabulation of the value that financial advisors provide their clients. While it is sometimes taken for granted, the time advisors spend trying to understand each individual investor matters greatly. They spend time trying to understand our goals, objectives, risk comfort and needs. All of this is essential to recommending an appropriate, efficiently diversified portfolio. And, as this study shows, it is time that pays well.